INTERNAL CONTROL & COMPLIANCE

INTERNAL CONTROL POLICY
Itroduction
Banking is a diversified and complex .linancial activity which is no longer limited within the geographic boundary of a country. In many banks internal control is identified with internal audit; the scope of internal control is not limited to audit work. It is an integral part of the daily activity of bank, which on its own merit identifyes the risks associated with the process and adopts a measure to mitigate the same. Internal Audit on the other hand is a part of Internal Control system which reinforces the control system through regular review.
Definition
Internal control is the process, affected by a company's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the effectiveness and efficiency of operations, the reliability of financial reporting and compliance with applicable laws, regulations, and internal policies.

Internal Control Environment
The internal control environment is the framework under which internal controls are developed, implemented and monitored.
Objective of Internal Control
The main objectives of internal control are as follows:
• Fificieney and effectiveness of activities ( performance objectives)
• Reliability, completeness and timelines of financial and management information (information ottiectives)
• Compliance with applicable laws and regulations (compliance objectives)

Policy Guidelines For Internal Control
Responsibility of the Board of Directors
The overall responsibility of establishing broad business strategy, significant policies and understanding significant risks of the bank rests with the Board of Directors.
Through the establishment of Audit Committee' the Board of Directors can monitor the effectiveness of internal control system.
The internal as well as external audit reports will be sent to the board without any intervention of the bank management and ensure that the management takes timely and necessary action as per the recommendations.
Have periodic review Meetings with the senior management to discuss the effectiveness of the internal control system of the bank and ensure that the management has taken appropriate actions as per the recommendations of the auditors and internal control.


Responsibility of the Senior Management
In setting out a strong internal control framework within the organization the role of Managing Director is very important. He! She will establish a Management Committee' (MANCOM), which will be responsible for the overall management of the Bank.
The MANCOM will put in place an internal control structure in the banking organization, which will assign clear responsibility, authority and reporting relationship.
The MA.NCOM will monitor the adequacy and effectiveness of the internal control system based on the bank's established policy & procedure.

Recognition and Assessment
• An effective internal control system continually recognizes and assesses all
• of the material risks that could adversely affect the achievement of the bank's goals.
Control Activities and Segregation of Duties:
-Control activities involve two steps: (1) the establishment of control policies and procedures and (2) verification that the control policies and procedures are being complied with.
-One of the most important aspects of internal control system requires that there is appropriate segregation of duties and personnel arc not assigned conflicting responsibilities.

Management Reporting System:
• Effective internal control system requires that there is an effective reporting system of information that is relevant to decision making. The information should be reliable , timely accessible and provided in a consistent format.
• Internal information must cover all significant activities of the bank arrangements.
• Most importantly the channels of communication must ensure that all staff fully understand and adhere to policies and procedures effecting their duties and responsibilities and that other relevant information is reaching the appropriate personnel.

Monitoring Activities & Correcting Deficiencies:
• There should be an effective and comprehensive internal audit of the internal control system carried out by operationally independent, appropriately trained and competent staff specially designated by the management The significant deficiencies identified by the audit team should be reported to the board on a periodic basis. The Audit Committee of the board should be the cell to whom such report should be forwarded for review.
• Preferably the internal control team should be reporting to the board of directors or its audit committee. If practical considerations do not permit internal control team to directly report to the board of directors then it can report directly to the MD.


Role of External Auditors in Evaluating Internal Control System:
• External Auditors by dint of their independence from the management of the bank can provide unbiased recommendation on the strength and weakness of the internal control system of the bank.
• They can examine the records, transactions of the bank and evaluate its accounting policy, disclosure policy and methods of financial estimation made by the Bank; this will allow the board and the management to have an independent overview on the overall control system of the bank.
Regulatory Compliance :
• The internal control system should always take into account the bank's internal processes to meet the regulatory requirement before conducting any operation.
• The bank must develop an effective communication process which will allow smooth distribution of relevant regulations among different departments and personnel.

Establishment of a Compliance Culture:
• The board of directors and the senior management must establish a compliance culture within the banking organization that emphasizes and demonstrates to all levels of personnel the importance of internal control.
• The board of directors and the senior management may establish a Code of Ethics' that all levels of personnel must sign and adhere to.

Organisatation Structure
Structure for Internal Control System
The essence of the ideal organizational structure that will facilitate effectiveness of the internal control system is the segregation of duties.
Up to which level this segregation will take place will depend on an individual bank.
In cases where such segregation is not possible, there must be certain monitoring mechanism which should be independently reviewed to ensure all policies and procedures are followed at the branch level.

Structure of the Internal Control Unit
The head of internal control unit should have a reporting line with the bank's board. The audit committee of the board can be the contact point for the internal control unit. This unit must also have a reporting line with the Managing Director of the bank.
The head of the internal control will be responsible for the both compliance and control related tasks which include compliance with laws and regulation, audits and inspection, monitoring activities and risk assessment. The head of internal control will report directly to the MD and also have an indirect line to the Audit Committee of the Board.